What is a 'Non-Performing Asset - NPA '

A nonperforming asset (NPA) refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days. While 90 days of nonpayment is the standard period of time for debt to be categorized as nonperforming, the amount of elapsed time may be shorter or longer depending on the terms and conditions set forth in each loan.

BREAKING DOWN 'Non-Performing Asset - NPA '

Banks usually categorize loans as nonperforming after 90 days of nonpayment of interest or principal, which can occur during the term of the loan or for failure to pay principal due at maturity. For example, if a company with a $10 million loan with interest-only payments of $50,000 per month fails to make a payment for three consecutive months, the lender may be required to categorize the loan as nonperforming to meet regulatory requirements. A loan can also be categorized as nonperforming if a company makes all interest payments but cannot repay the principal at maturity.

The Effects of NPAs

Carrying nonperforming assets, also referred to as nonperforming loans, on the balance sheet places three distinct burdens on lenders. The nonpayment of interest or principal reduces cash flow for the lender, which can disrupt budgets and decrease earnings. Loan loss provisions, which are set aside to cover potential losses, reduce the capital available to provide subsequent loans. Once the actual losses from defaulted loans are determined, they are written off against earnings.

Recovering Losses

Lenders generally have four options to recoup some or all of the losses resulting from nonperforming assets. When companies are struggling to service debt, lenders can take proactive steps to restructure loans to maintain cash flow and avoid classifying loans as nonperforming. When defaulted loans are collateralized by assets of borrowers, lenders can take possession of the collateral and sell it to cover losses to the extent of its market value.

Lenders can also convert bad loans into equity, which may appreciate to the point of full recovery of principal lost in the defaulted loan. When bonds are converted to new equity shares, the value of the original shares is usually wiped out. As a last resort, banks can sell bad debts at steep discounts to companies that specialize in loan collections. Lenders typically sell defaulted loans that are not secured with collateral or when the other means of recovering losses are not cost-effective.

RELATED TERMS
  1. Problem Loan

    In the banking industry, a problem loan is one of two things; ...
  2. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  3. Loan Loss Provision

    A loan loss provision is an expense set aside as an allowance ...
  4. Non-Amortizing Loan

    A type of loan in which payments on the principal are not made, ...
  5. Cumulative Interest

    Cumulative interest is the sum of all interest payments made ...
  6. Negatively Amortizing Loan

    A loan with a payment structure that allows for a scheduled payment ...
Related Articles
  1. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  2. Investing

    Bank of America's 3 Key Financial Ratios (BAC)

    Discover some of the key financial ratios that show the quality of Bank of America's loan portfolio and how profitable the bank has been.
  3. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  4. Personal Finance

    Interest-Only Mortgages: Home Free or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  5. Personal Finance

    Time To Consolidate Your Student Loans?

    Use these strategies to decide whether consolidating your student loans makes sense for you – and what to do next if it does.
  6. Personal Finance

    Getting a Loan Without Your Parents

    Use these five things to finance your dreams without banking on a second signature.
  7. Personal Finance

    10 Tips to Topple Student Loan Debt

    How to manage those burdensome payments as you embark on adult life.
  8. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  9. Personal Finance

    College Loans: Private vs. Federal

    Not all student loans are the same. Know what you're getting into before signing on the dotted line.
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including ...
  2. Bubble

    1. An economic cycle characterized by rapid expansion followed by a contraction. 2. A surge in equity prices, often more ...
  3. Swap

    A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, ...
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
Trading Center